Issue 90 – Regulatory and Tax Developments in March 2012 ppt

1 FUND NEWS March 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 90 – Regulatory and Tax Developments in March 2012 Regulatory News European Un

1

FUND NEWS March 2012

Investment Fund Regulatory and Tax developments in

selected jurisdictions

Issue 90 – Regulatory and Tax

Developments in March 2012

Regulatory News

European Union

European Commission publishes

Green Paper

There has been an explosion in shadow

banking activities over the past decade

and the Financial Stability Board (FSB)

estimated that shadow banking activities were worth around €46 trillion in 2010

The European Commission is keen to impose tougher requirements on shadow banking and published a Green Paper on 19 March 2012 outlining the

Regulatory Content

European Union

European Commission publishes

Green Paper on Shadow Banking Page 1

EMIR adopted by Parliament Page 3

ESMA final report on Short Selling Technical Standards Page 4

ESMA updates Guidelines on risk measurement for certain types of

structured UCITS Page 4

Ireland

New Irish Corporate Structure for Funds (SCIAV) Page 4

UCITS Notice 14 and non-UCITS Notice 2 – Disclosure of related party

transactions Page 4

Luxembourg

Specialised Investment Fund law amendments voted Page 4

UK

FSA consults on a new contractual

legal form of Authorised Fund Page 5

International

IOSCO consults on exchange traded funds regulation Page 7

Tax Content

Luxembourg

Aberdeen Case E-Alerts Page 7

The Netherlands

CAA with Norway re closed FGR Page 7

Fund News – March 2012

2

broad range of issues that require action

at EU level to address the threats posed

by shadow banking activities and

entities This comes in advance of the

G20 meeting of Finance Ministers and

Central Bank Governors in Washington

D.C on 20 April 2012

The paper focuses on the following

entities and activities:

 Securitization Special Purpose

Vehicles (SPV)

 Finance companies providing credit

and securities entities falling outside

banking regulation

 Money Market Funds (MMF) and

investment funds that are leveraged

or provide credit, including

Exchange Traded Funds (ETF)

 Insurance and reinsurance firms

that issue or guarantee credit

products

 Securities lending, repurchase

transactions and securitization

Options being considered by the EU

include increasing the capital

requirements of shadow banks, or

forcing them to comply with oversight

rules that were originally intended for

hedge funds Clients will need to be

aware of the impact that new

regulations could have on their off

balance sheet activities

Progress has already been made in the

EU on many of the issues raised, either

through direct or indirect regulatory

initiatives but work is set to follow in the

following areas:

 In banking regulation, the Commission is considering extending the scope of financial institutions and entities covered by current banking law and may extend certain provisions in the CRD IV to non-deposit taking finance companies, thus capturing non-banks under stricter banking regulatory regimes The Commission is investigating how to ensure that bank-sponsored shadow banking entities are appropriately consolidated and fully subject to Basel III rules, which will impact banks’ risk based capital and liquidity ratios Options are also under consideration regarding bank exposures to shadow banking entities, and include extending the look-through to account for leverage

of investments in funds and applying the CRD II capital rules to the treatment of liquidity lines for securitization vehicles to all shadow banking entities

 For asset management regulation, the Commission raises valuation and liquidity issues in constant NAV MMFs, and issues regarding collateral and conflicts of interest in securities lending and swaps transactions in ETFs, although many

of these issues are being addressed

by new ESMA rules

 The Commission is actively contributing to FSB work in relation

to securities lending and repurchase agreements, an area also

highlighted as a key concern The specific issues to be addressed include collateral management,

reinvestment of cash collateral, re-hypothecation and improved transparency for markets and supervisors Firms should prepare for tighter rules coupled with improvements to market infrastructure in this area For securitizations, the Commission will examine the effectiveness of measures already taken in CRD II and CRD III and consider extending measures to other sectors Work is also underway in relation to resolution planning for non-banks The Green Paper is available via the following web link and is open for consultation until 1 June 2012

http://ec.europa.eu/internal_market/bank

/docs/shadow/green-paper_en.pdfShadow Banking

Fund News – March 2012

3

EMIR

adopted by European Parliament

On 29 March 2012 the European

Parliament approved at first reading the

Regulation on OTC Derivatives, Central

Counterparties and Trade Repositories,

also known as the European Market

Infrastructure Regulation (EMIR)

The new Regulation meets the G20

commitment in September 2009 at

Pittsburgh that "all standard

Over-The-Counter (OTC) derivative contracts

should be traded on exchanges or

electronic trading platforms, where

appropriate, and cleared through central

counterparties by end-2012 at the

latest." Furthermore, they acknowledged

that "OTC derivative contracts should be

reported to trade repositories and that

non-centrally cleared contracts should be

subject to higher capital requirements."

The main aspects of the regulation are

as follows:

• Obligatory clearing for standardised

OTC derivatives through central

counterparties;

• Reporting for all derivatives (listed

and OTC derivatives) to trade

repositories, which would have to

publish aggregate positions by class

of derivatives;

• The work of trade repositories will

be monitored by the European

Securities and Markets Authority

(ESMA), which would be

responsible for granting or

withdrawing their registration;

• Stringent rules for Central

Counterparties (CCPs) regarding

capital, organisation and conduct of

business standards;

• CCPs from third countries will be

recognized in the EU only if the legal

regime of the third country in question provides for an effective equivalent system for recognition;

• A "light touch" regime has been awarded to pension schemes with regard to the clearing obligation For these schemes, the obligation would not apply for three years, extendable by another two years plus one, subject to proper justification

• risk mitigation standards for contracts not cleared by a CCP (e.g

exchange of collateral)

Which contracts have to be cleared?

To have as many OTC contracts as possible cleared through a CCP, the Regulation introduces two approaches

to determine which contracts must be cleared:

• a 'bottom-up' approach:

In this case when a competent authority has authorised a CCP to clear a class of derivatives, it will inform ESMA who will assess whether a clearing obligation should apply to that class of derivatives

in the EU, and develop draft Regulatory technical standards which will have to

be adopted by the Commission

• a 'top-down' approach:

In this case, ESMA, on its own initiative and in consultation with the European Systemic Risk Board, will identify contracts that should be subject to the clearing obligation but for which no CCP has yet received authorisation

The rules on clearing OTC derivatives, reporting on derivatives transactions and risk mitigation techniques for non-centrally cleared OTC derivatives will apply, among others, to UCITS and their

managers and to alternative investment funds managed by alternative

investment fund managers (AIFM) Before the EMIR rules are implemented, the European Supervisory Authorities (ESAs) first need to develop technical standards The ESAs must submit these standards to the Commission by 30 September 2012 In line with G20 commitments, these new standards should be fully adopted by the Commission by the end of 2012 Central counterparties will have to apply for authorisation under the new

European regime at the latest six months after the adoption of the technical standards by the Commission

In the meantime, CCPs must continue to comply with national rules on

authorisation

The date of application of the reporting obligation and clearing obligations will be determined in the new technical

standards to be developed by 30 September 2012

Fund News – March 2012

4

Short Selling

ESMA final report on technical

standards

On 28 March 2012 the European

Securities and Markets Authority

(ESMA) published their final report to the

Commission containing draft technical

standards on the Regulation 236/2012

on Short Selling and certain aspects of

Credit Default Swaps

The draft standards were submitted to

the European Commission and the

Commission has three months to decide

whether to endorse ESMA’s draft

technical standards

The report, which includes a cost-benefit

analysis, is available via the following

web link:

http://www.esma.europa.eu/content/Dra

ft-technical-standards-Regulation-EU-No-

2362012-European-Parliament-and-Council-short-sel

ESMA updates Guidelines on risk

measurement for certain types of

structured UCITS

ESMA published additional guidelines

(Ref: ESMA/2012/197) on the

requirements on the calculation of global

exposure relating to derivative

instruments, to provide certain types of

structured UCITS with an optional

regime for the calculation of the global

exposure using the commitment

approach

The Guidelines are available via the

following web link:

http://www.esma.europa.eu/page/Invest

ment-management-0

Ireland

New Irish Corporate Structure for Funds (SCIAV)

Currently, Irish funds structured as corporate funds are set up under Irish company law and therefore are subject

to standard requirements imposed on all Irish companies The Irish Minister for Finance has agreed to introduce a new corporate structure designed specifically for the funds industry The main advantages of the new structure are that

it will meet US check-the-box requirements and reduce administrative costs Existing Irish funds will be able to convert to this new structure The new legislation should be in place by the end

of 2012

UCITS Notice 14 and non-UCITS Notice 2 – Disclosure of related party transactions

The Irish regulator has issued an information note on these regulatory rules The note clarifies the type of parties and the types of transactions which should be set out in the related party disclosure report

Luxembourg

Specialised Investment Fund

(SIF) law amendments voted by Parliament

The law of 26 March 2012 that amends the Specialised Investment Fund (SIF) law of 13 February 2007 introduces some important changes to the hugely successful SIF regime

The main amendments are as follows:

1 Requirement for regulatory approval

of the SIF before the launch of activities

The new law abolishes the option of launching a SIF prior to obtaining the required regulatory approvals from the

Commission de Surveillance du Secteur Financier (CSSF) In practice very few

fund promoters embraced this facet of the law that made possible the prior launch of a SIF, and the subsequent submission of the application file within one month of launch Nevertheless the old regime gave leave to fund promoters

to quickly launch a new SIF, once an informal go-ahead from the CSSF had been secured, and the new rules are expected to have a negative impact on the "time to market" of some new SIFs

Fund News – March 2012

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In addition, the SIF approval

requirements have been extended to

require CSSF approval of those persons

who will perform the intellectual

portfolio management, requiring that

they are honorable and have sufficient

experience and expertise in the type of

SIF managed

The law also foresees new rules dealing

with the appointment of independent

asset managers that will need to be

licensed or registered asset managers,

and subject to prudential supervision

The SIF will be required to conduct a

detailed due diligence on the asset

manager prior to their selection

2 New rules on Risk Management and

Conflicts of Interest

In line with the forthcoming Alternative

Investment Fund Managers Directive

(AIFMD) requirements, the SIF will be

obliged to implement appropriate risk

management systems to monitor,

measure and manage the risks in the

portfolio The SIF will need to be

structured and organised in such a way

as to minimise the risk of conflicts of

interest, and have in place a policy to

manage any conflicts that may arise It is

foreseen that the CSSF may issue

further detailed regulations defining the

precise requirements in relation to risk

management and conflicts of interest

management

3 Possibility to cross-invest between

sub-funds in same umbrella

structure

The SIF regime has been brought into line with the UCITS regime by allowing sub-funds in the same umbrella structure to invest in one or more sub-funds in the umbrella, subject to some specific conditions This new feature opens up the possibility of creating fund

of funds within the same umbrella structure as well as providing opportunities to generate other management and operational efficiencies, and has been keenly awaited by the funds industry

The law was published in the Mémorial

(Official Journal) on 30 March 2012 and came into effect on 1 April 2012

The full text of the law (in French) is available via the following web link:

http://www.legilux.public.lu/leg/a/archive s/2012/0063/index.html

UK

FSA consults on a new contractual legal form of Authorised Fund

On 6 March 2012, within its quarterly consultation paper (“CP 12/5”), the Financial Services Authority (”FSA”) set out its proposals to extend the eligible legal forms of UK Authorised Funds to include co-ownership schemes and limited partnership schemes The consultation and proposed rules are aligned to the proposed tax regulations intended to enable the UK to have a tax transparent authorised fund suitable as a UCITS IV master fund and generally as a tax efficient pooling vehicle

Currently the FSA can only authorise funds that take the legal form of a unit trust (“AUT”) or an open-ended investment company (“OEIC”), neither

an AUT nor an OEIC provide an appropriate legal form for a tax transparent fund It is generally the case that for a UCITS Master fund to be tax efficient for a wide range of prospective investors, including UCITS Feeder funds, and also for the UK to have a tax

Fund News – March 2012

6

efficient pooling vehicle in general (i.e

including Non-UCITS Retail Schemes

(“NURS”) and Qualified Investor

Schemes (“QIS”)) then it requires a tax

transparent fund

HM Treasury (HMT) has proposed that

the UK tax transparent fund should take

either the legal form of a co-ownership

scheme or a limited partnership scheme

and that both would have to be

authorised by the FSA but also considers

that the type of fund should not be

restricted to UCITS funds but should

include NURS and QIS The HMT’s

proposal was discussed in Fund News

issue 88:

http://www.kpmg.co.uk/email/02Feb12/

266160/KPMG_Fund_News_Issue88.ht

ml

The proposed authorised co-ownership

scheme and limited partnership

schemes are to be contractual in legal

form and so are collectively referred to

as authorised contractual schemes

(“ACS”) by the FSA, with a proposed

new definition for such schemes An

ACS will not be subject to corporation,

income or capital gains tax This

differentiates the ACS from AUTs and

OEICs

The co-ownership scheme will not have

legal personality and the scheme’s

assets are held by investors as tenants

in common (in Scotland as common

property) and managed on their behalf

by the manager with the depositary

having legal title as a custodian

In the limited partnership scheme it is

proposed that the authorised fund

manager will be the general partner and

the depositary will be a limited partner

The investors will be limited partners

The scheme is to be formed under the Limited Partnership Act 1907

(amended)

In introducing rules for the ACS the FSA has reflected the similarities between the ACS and the AUT and the consultation only discusses where an ACS is treated differently from an AUT, for example recognising that there is no transfer or units or, therefore, box management for an ACS

While an AUT or an OEIC can take an umbrella form with a number of sub-funds, only the co-ownership form of an ACS is to be permitted to be an umbrella scheme and the FSA proposes not to permit the limited partnership to be an umbrella scheme If a co-ownership scheme is established as an umbrella it will have to be with each scheme in the umbrella being operated on a “protected cell” basis

In line with the prevention of the transfer of units in the co-ownership scheme, the Treasury proposes to amend the Limited Partnerships Act

1907 so limited partners may not assign their units with the general partner’s permission That the units in an ACS are not generally transferable accords with the tax transparent status of the scheme, however, the FSA needs to consider and consult on the specific commercial circumstances when its rules need to permit transfers such as authorised fund mergers and

reconstructions

A restriction on transfer of units means

that an ACS will not have “box management” and the related transfer

of units between investors via “the manager’s box” Investors’

subscriptions and redemptions of units will result in creation and cancellation of units for each investor In a

co-ownership scheme a manager could hold units as an investing co-owner but

in a limited partnership scheme the manager, as the general partner, could not also be an investor (a limited partner)

CP 12/5 is 244 pages – the FSA’s proposals for Authorised Contractual Schemes are contained in Chapter 8 and Appendix 8 The relevant sections are: Chapter 8 (pages 43 to 54) Proposed changes to the Collective Investment Schemes Sourcebook – this includes the FSA’s consultation questions; and Appendix 8 (pages 135 to 243) – in which the amendments to the FSA’s Handbook are detailed

FSA’s CP 12/5 is available via this web

link:

Fund News – March 2012

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International

IOSCO consults on Exchange Traded

Funds (ETF) regulation

The Technical Committee of the

International Organization of Securities

Commissions (IOSCO) has published a

consultation report entitled “Principles

for the Regulation of Exchange Traded

Funds (ETFs)” which examines the key

regulatory issues regarding ETFs The

report also proposes 15 principles to

assess the quality of regulation and

industry practices relating to ETFs

regarding investor protection, sound

functioning of markets and financial

stability

The principles address ETFs that are set

up as Collective Investment Schemes

(CIS) and are not meant to encompass

other Exchange-Traded Products (ETPs)

The principles are categorized as

follows:

• Principles related to ETF

classification and disclosure

• Principles related to Marketing and

Sale of ETF shares

• Principles related to the structuring

of ETFs

• Principles relating to broader risk of

liquidity shocks and transmission

across correlated markets

Comments must be submitted before

27 June 2012

The full report is available on the IOSCO

website at www.iosco.org

Tax Luxembourg

Aberdeen Case E-Alerts

The latest Aberdeen E-Alert (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) discusses the recent Dutch Court of Appeal ruling that grants full withholding tax refund to Finnish investment funds

The e-alert is available via the following web link:

http://www.kpmg.com/LU/en/IssuesAnd Insights/Articlespublications/Pages/Aber deene-alerts-Issue2012-06.aspx

The Netherlands

CAA with Norway re closed FGR

The Netherlands have concluded a Competent Authority Agreement (CAA) with Norway regarding the tax treatment

of a Dutch closed FGR ('besloten fonds voor gemene rekening')

A closed FGR is treated as tax transparent for Dutch tax purposes This implies that all income and gains derived through such FGR are attributed to the investors in proportion to their

participations in the FGR FGRs are frequently used for asset pooling by pension funds and other investors

In the CAA the Norwegian tax authorities confirm that a closed FGR will also be regarded as tax transparent for the application of the tax treaty concluded between the Netherlands and Norway

Previously, the Netherlands have concluded similar CAAs with Canada, Denmark and the United Kingdom It is expected that CAAs with other countries (including the USA and Switzerland) will follow

The CAA is available via the following web link

https://www.officielebekendmakingen.nl /stcrt-2012-5658.pdf

Fund News – March 2012

8

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Audit

Nathalie Dogniez

Partner

T: + 352 22 5151 6253

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www.kpmg.lu

Publications

Tax Georges Bock

Partner

T: + 352 22 5151 5522 E: georges.bock@kpmg.lu

Advisory Vincent Heymans

Partner

T: +352 22 5151 7917 E: vincent.heymans@kpmg.lu

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity Although we endeavour to provide accurate and

timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future No one should act on such

information without appropriate professional advice after a thorough examination of the particular situation

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Investor Assurance: The Road to Transparency

here

UCITS IV - Fill the glass to the brim II: have we broken through?

An update on the tax implications

of UCITS IV here

Charles Muller

Partner

T: +352 22 5151 7950 E: charles.muller@kpmg.lu

IFRS Practice Issues: Applying the consolidation model to fund managers

here